The decision to increase the capital base of Nigeria’s Islamic lenders, Jaiz Bank PLC, Taj Bank, and Lotus Bank Limited, is expected to drive industry growth in the coming years, according to a note from Fitch Ratings. The global rating agency predicts continued growth in the Islamic finance sector in Nigeria over 2024–2025, driven by the expected rise in equity issuance for Islamic banks to meet the Central Bank of Nigeria’s (CBN) increased paid-in capital requirements.
Although Islamic banks have lower capital requirements compared to conventional banks, providing them with an advantage and lower barriers to entry, Fitch expects their market share to remain below 2% as conventional banks are likely to grow at a faster pace.
The CBN announced in March 2024 that Islamic banks, commercial banks, and merchant banks must meet significantly higher paid-in capital requirements by the end of the first quarter of 2026 due to the devaluation of the Nigerian naira since May 2023, which has impacted banking capital ratios and increased credit concentration risks.
The Islamic finance industry in Nigeria was estimated to be USD3.8 billion at the end of 2023, with sukuk accounting for 59.3% of the total industry value, followed by non-interest banks (39.8%), and Islamic funds and takaful (0.9%). Challenges in the industry include gaps in distribution networks compared to conventional banks, low public awareness and demand for Islamic products, and opposition to Islamic finance from certain segments of the public.
The minimum capital requirement for non-interest national banks has doubled to N20 billion, with commercial national banks needing N200 billion and merchant banks requiring N50 billion. Jaiz Bank PLC recently signed a memorandum of understanding with the Islamic Corporation for the Development of the Private Sector (ICD) to explore investment opportunities for business growth and regional expansion.
Taj Bank and Lotus Bank must also comply with the N20 billion minimum paid-in capital requirement. Despite the potential for growth in Nigeria’s Islamic finance industry, with Nigeria having the largest Muslim population in Africa and a significant unbanked population, there are still challenges that need to be addressed to fully realize this potential.